A212: The short answer is that there is no requirement for an Incoterms Rule to be shown anywhere other than in a private contract of sale, and only then if the parties to that contract wish to do so.
But the use of Incoterms is frequently overemphasized.
For example, clearing agents sometimes ‘force’ Incoterms into a transaction by pre-printing the expressions on their clearing instructions, as though their client has no other option, and that a commercial term is somehow material to the service-provider’s function, when neither assumption is true.
This is an error made by banks too, for example on L/C application forms, and there are even examples in the SARB guidelines.
Adding to the challenge, SARS Customs sometimes mention Incoterms Rules in their various External Guides, although this is without ever connecting the product directly to the subject of the Guide. Any reference to the Rules normally just hangs there, lost in a list of definitions; discreet, and irrelevant to the main text.
Collectively this over-emphasis gives the impression that using Incoterms Rules is somehow compulsory and, further, that the Rules have a connection to the Customs process.
This broad misunderstanding across so many sectors becomes a self-reinforcing myth.
Bear in mind that if the merchants really wanted to use a commercial term, Incoterms would only be one option open to them, noting too that commercial terms may be entirely avoided.
Rather, what must be shown on the commercial invoice is a Customs’ valuation term or expression. Unfortunately, certain words and acronyms used in the valuation process sound similar to commercial terms, and this results in a confused mixing of the two unrelated subjects.
Incoterms Rules are identified using a system of capital letters, for example: FOB (free on board) and CIF (cost, insurance, and freight).
In WTO (World Trade Organisation) documentation, Customs valuation expressions are presented in lowercase letters, separated using full-stops, for example: f.o.b. (free on board) and c.i.f. (cost, insurance, and freight).
Correctly written the difference between the two systems is preserved, but when spoken they sound similar (if not identical) and they are easily confused.
The WTO lower-case system identifies the moment of valuation used in the WCO (World Customs Organisation) valuation framework, which defines price composition at the ex-works, f.a.s., f.o.b., c&f, and c.i.f. levels.
Private contract terms like Incoterms Rules divide risk and cost between the seller and buyer and have no legal relevance to the valuation framework.
The claimed widespread use of Incoterms does not change this position or expand the application of the Rules as Customs’ tools, and it was never the intention of the copyright holders, the ICC (International Chamber of Commerce), that they should do so.
Incoterms Rules are not price indicators. This is explicitly stated by the ICC drafting committee in the introduction to the 2020 text and, regardless, Customs officers and/or clearing agents could never reliably use a commercial term for valuation purposes due to the infinite number of possible variations in the private interpretation and execution of any contract.
Commercial terms, when and if used, privately bind the seller and buyer. Where they apply, they apply without the force of law.
Valuation expressions bear on the Customs valuation process, a mechanism that both the exporter and importer will encounter in the ordinary course of business. These expressions apply as a matter of law.
The two are not interchangeable or connected concepts.
The seller is not the exporter, the buyer is not the importer. The name changes are not arbitrary. They are important labels in differentiating the various component functions that comprise any cross-border trading model.
Although there are exceptions, most merchants, the majority of clearing agents, nearly all freight forwarders and logistics providers – and even a handful of Customs officials, conflate commercial terms (particularly Incoterms Rules) with the names of valuation points, leading ultimately to the incorrect expectation that commercial terms must be declared on a commercial invoice.
As noted, this misunderstanding reinforces itself in practice, making it difficult to correct, yet for clarification you need merely take an example or two.
The Customs valuation “ex-works” represents the price of the supply outside the supplier’s factory gates, loaded on a vehicle and cleared for export.
The Incoterms Rule EXW (alternatively spoken as “Ex Works” in English) represents the privately agreed passing of cost and risk in the supply, while the supply stands inside the seller’s works; not loaded on a vehicle and not cleared for export (perhaps never to be cleared for export).
The contract terms EXW (Ex Works) is a domestic term unsuited to cross-border trade, whereas an ex-works price is vital to the valuation process in all cross-border events.
But to the ear they can sound the same.
The physical and administrative model addressed in the Incoterms Rule FCA may give rise to either a Customs’ ex-works or a Customs’ f.o.b. value – the devil is in the detail, and unless a party wished to trawl through the merchants’ contract in full, this detail is unknowable (and fundamentally irrelevant) to a Customs’ official or a clearing agent, a logistics provider or a banker.
FOB vs. f.o.b. is an even commoner and more disruptive example of misunderstanding.
The lower-case f.o.b. price of cargo is its value for Customs purposes on the vessel, truck, train, or aircraft taking it from the country of export – broadly, the value immediately before the international carriage.
In Incoterms, an upper-case FOB contract is the expression of the intended division of risk and cost when goods are loaded on a particular type of seafreight vessel, at a particular type of seaport, one used when merchants are documentarily trading a particular type of underlying cargo.
It is a commercial expression describing a 19th century European model, with limited modern day application such that the ICC cautions against the use of the term in containerised trade.
Obviously, the merchants could never have an FOB contract in an airfreight transaction, at least not under Incoterms Rules although they may readily apply any one of several definitions of F.O.B. (note how that is written, in capitals with full-stops) in sales contracts involving carriage by airfreight, whenever the parties are using the USA Uniform Commercial Code system of Trade Terms, which they are quite entitled to do, whether they trade with North America or not.
The reason you can’t have an Incoterms FOB contract in airfreight is that airfreight involves aircraft. It does not involve waterborne vessels or oceangoing ships.
That’s why it is called “air” freight, I suspect.
But in airfreight an importer (and exporter) will always be required to declare the Customs’ f.o.b. value of the supply. In South Africa, as with most developed economies, an f.o.b. value is both the Customs’ statistical value and the commonest value used for the calculation of import duties and taxes.
The valuation expression ex-works is not the contract term EXW or Ex Works, just as c.i.f. is not CIF and f.o.b. is neither FOB nor F.O.B.
It is not necessary for a Customs officer to have an in-depth knowledge of the commercial world’s various contract terms, given that such an understanding would add nothing to the application of the established and legislated valuation system.
But in a strange future world, should SARS ever prescribe the exclusive use of Incoterms Rules, and further insist that the Rule is reflected on the commercial invoice, well, so be it.
For now, I can find nothing in current SARS literature that dictates the use of Incoterms, and since Incoterms Rules are not laws I believe SARS would have no grounds to enforce their use anyway, even in the unlikely event that they wished to.
In summary: A commercial invoice should (if not must) reflect the Customs’ ex-works, f.a.s., f.o.b., c&f, or c.i.f. value of the supply as applicable, and as defined in the WTO/WCO valuation framework.
Perhaps this was the intended message from your clearing agent, and they have made the common mistake of confusing the two unrelated systems.
The next course on Commercial Terms and Incoterms Rules – which have nothing to do with valuation and everything to do with the private division of risk and cost in a commercial transaction – will be held over two-days on the 13th & 14th of May.
If you’d like to book, email me: [email protected]